How to calculate your debt ratios?

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Something you will hear lenders and banks talk about as part of your application process is your Debt To Income Ratios.  This is a critical part of the loan application and something lenders review to see if you can afford the new loan that you are applying for.  Typically there are two different types of debt ratios that will be reviewed.  The first is the Housing debt ratio.  This is the ratio that is used to calculate what percentage of your monthly income will be going towards your new house payment included taxes, insurance, and mortgage insurance if applicable.  The simplest way to calculate your housing ratio is to take your total monthly payment divided by your gross monthly income.  For example $1500 (new house payment) / $4,000 (gross monthly income) = .375 or 37.5% housing ratio.  Typically the housing ratio should be at least under 47% of your gross monthly income.

The second type is the total debt ratio.  This is the ratio that is used to calculate what percentage of your monthly income will be going towards your new house payment included taxes, insurance, and mortgage insurance and the outgoing monthly debts shown on your credit report.  The simplest way to calculate your total debt ratio is to take your total monthly house payment and credit report monthly debts divided by your gross monthly income.  For example $1500 (new house payment) + $600 (total credit report monthly debts)  / $4,000 (gross monthly income) = .525 or 52.5% housing ratio.  Typically the total debt ratio should be at least under 50% of your gross monthly income.

Contact us here if you would like more information on applying for a new mortgage loan.

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